Judge Orders Oil Pipeline Drained

Oil from the Bakken field in North Dakota must stop flowing in the Dakota Access Pipeline while the U.S. Army Corps of Engineers conducts an environmental impact review.  In early July 2020, a U.S. district court judge in Washington DC vacated a permit to operate the pipeline while awaiting the study results.     

Work on the 30” pipe was finished in June 2017, based on state and local permits to build along a route extending southward from northwestern North Dakota through South Dakota and Iowa and finally terminating in southern Illinois.  Environmental groups as well as the Standing Rock Indian Reservation, which straddles the state line between the two Dakotas, cried foul from the beginning.  Opponents argued construction permits were hastily approved and failed to adequately consider the environmental impact of the pipeline.

Of particular concern for residents of the Standing Rock Reservation is the segment of the pipeline that crosses under Lake Oahe, a long winding water body created by the Oahe Dam across the Missouri River in central South Dakota.  The ‘lake’ extends northward over 200 miles from just north of Pierre, South Dakota to Bismark, North Dakota.    With an area over 370,000 acres, it is the fourth largest reservoir in the U.S.  Over four dozen recreation areas are strung along either side of the lake for camping, swimming and boating.  There are hiking and biking trails running miles along the water edge.  With large stocks of Chinook salmon, walleye, Northern pike, bass and catfish, the lake attracts fishing enthusiasts from far and wide.  Deer, turkey and pheasant find superb habitat in the scrub and tall grasses along the lake, giving rise to highly popular licensed hunting seasons. 

Recreation is not uppermost on the minds of the Standing Rock Reservation.  Its far flung communities, farms and ranches rely on Lake Oahe for drinking water.  The water intake for the Standing Rock Rural Water Supply System is near Mobridge, South Dakota, just south of the point at which the Dakota Access Pipeline crosses under Lake Oahe.  A rupture in the pipeline could mean disaster for the reservation’s 10,000-plus residents.   A breach in the pipeline running under Lake Oahe could go undetected for weeks in the remote environs of the Dakota plains.  The judge’s recent action to stop the flow of oil in the pipeline at least temporarily removes the reservation’s water supply risk presented by the Dakota Access Pipeline.

Of course, the pipeline builders made a strong pitch for the safety of oil pipelines over alternative oil transport options.    Energy Transfer (ET:  NYSE) cites pipeline accident data from the Pipeline and Hazardous Materials Safety Administration (PHMSA), the federal agency responsible for pipeline safety.  The data portrays pipelines as safer than rail and rail as safer than trucks.  Unfortunately, what Energy Transfer management fails to mention is that PHMSA only counts pipeline accidents where there is a human fatality or injury.  Otherwise environmental damage associated with spills and ruptures are glossed over. 

Energy Transfer has also made the point that there is already a fossil fuel pipeline crossing under Lake Oahe.  The Northern Border Pipeline is a 1,400 mile natural gas pipeline extending south and east from an area near the Montana-Saskatchewan border to Indiana.  Indeed, it crosses under Lake Oahe.   The idea is laughable that because the Standing Rock Reservation water supply is already at risk for a natural gas pipeline breach, the community should welcome the opportunity to dramatically increase that exposure with a crude oil pipeline.  

With the environmental risk successfully exported by omission to another party, the Standing Rock Reservation, Energy Transfer has had no difficulty in convincing all constituents of the merits of the Dakota Access Pipeline.  Its partners in the project  -  Phillips Partners (PSXP:  Nasdaq) and the joint venture between Marathon Petroleum (MCP:  NYSE) and Enbridge (ENG:   NYSE)  -  remain keen on keeping the project going.  Energy Transfer brags the pipeline is now handling as much as 40% of the Bakkan field production, helping to lower costs of transport by as much as $3.00 per barrel. 

It is not likely the state government officials care much about the savings of $3.00 per barrel.   The important teaser for early and continued local enthusiasm for the pipeline, is the potential for over $50 million in annual property taxes that would be generated each year across the four states hosting the pipeline.  Those property taxes provide a strong incentive to take a chance on a pipeline leak.

This has left the Standing Rock Reservation quite literally standing alone and with no compensation for the environmental risk presented by the pipeline.    The Dakota Access Pipeline does not actually cross reservation land.  Nonetheless, it crosses directly under the water body, Lake Oahe, that supplies the reservation with its primary source of potable water.  This water is the responsibility of the U.S. Army Corps of Engineers.  In 2015, the Obama Administration had halted the approval process for the project in order to gather more environmental information.  Unfortunately, as in all things related to Obama, the Trump Administration pushed full forward without completing the environmental study.

Oil and gas producers have made a slick practice of off-loading the risk of fossil fuel production and distribution to other parties, all the while making an investment case based on only a portion of the true costs and liabilities of their business.  It has taken a ragtag bunch of Indians living in a wind-swept reservation to take a $17 billion oil and gas producer to task by whatever means necessary, from roadblocks to injunctions.  As a consequence, the Corps of Engineers study must be completed and now the pipeline must be drained of oil waiting for its conclusion. 

Energy Transfer management claims the U.S. District Court in Washington DC has no jurisdiction and cannot order a halt to operations.  It appears traders are inclined to believe the company’s bravado.  Its shares traded off in the first hours following announcement of the judge’s ruling, but have since ratcheted back higher under above average trading volume.  Only time will tell whether Energy Transfer and its partners will end up holding their own bag of ‘negative externalities’, which the group tried to off-load to the Standing Rock Reservation.   

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.